The lease option is one of the most common add-ons to a commercial lease and is more often than not granted by the landlord when asked for. When the landlord drafts the lease they drop in their standard lease rider or amendment language. There it is: the tenant may renew the lease for five years (typically) so long as they give the landlord advance written notice by a defined deadline. End of story.
No…it isn’t! Also commonly found in option language is a clause that states that the option is “personal” to the party who signed the lease and cannot be transferred. Most tenants don’t give much consideration to the possibility of assigning their lease down the road and so they don’t give this much thought. But consider the following real situation I just negotiated for a retail service business in West Hollywood:
The shop space is in a burgeoning retail district in town that is experiencing exploding rents just a block to the west. First, we were able to negotiate a set rent for the option period, so we avoided surprises that can come with a “fair market rent” reset. Then I asked to delete the sentence that said that the extension option was not transferrable. The landlord did not hold a strong position on this language – it has just been in their leases since time immemorial – and so he agreed to the change.
Now let’s project into the future. The tenant decides for whatever reason to sell the business a few years down the line. Let’s say there are three years left on the lease. The high rents from a block over have migrated into my client’s neighborhood making the rent we negotiated well below market. Having eight years of below market rent (three remaining on the original term plus five in the option) versus just three could positively impact the value of this business by $500,000.
Now that’s keeping your options open.